California Settles Case Involving Contributions to a Ballot Committee

The California Fair Political Practices Commission (“FPPC”) issued its largest fines ever on October 24, 2013, against two groups that allegedly served as conduits for millions of dollars spent on California ballot measures in 2012. Together, the groups have been tagged with a combined $1 million fine, and the PACs that received some of the funds have been ordered to disgorge a total of $15 million (although one organization has been terminated and the other has just shy of $1 million in the bank, so it is not clear how they will disgorge $15 million).

The FPPC chair, who is now a Commissioner at the FEC, said the “case highlights the nationwide scourge of dark money nonprofit networks hiding the identities of their contributors.”

The FPPC went to court right before the 2012 election to force Americans for Responsible Leadership (“ARL”) and the Center to Protect Patients’ Rights (“CPPR”) to disclose its donors under a regulation the FPPC adopted in May 2012. This regulation requires disclosure of donors in a number of situations where the donations will be used for independent expenditures that support or oppose a candidate or a ballot measure.

As set forth in the settlement document, there were two sets of contributions at issue in the case. Both originated with a 501(c)(6) entity known as Americans for Job Security (“AJS”). AJS raised approximately $29 million from 150 donors to engage in a variety of issue advocacy efforts. As the settlement makes clear, AJS was not required to register or disclose anything with the FPPC because it raised its funds for issue ads that did not expressly advocate the support or defeat of a referendum. AJS then gave a total of just under $25 million to CPPR, which is a 501(c)(4) organization, during September and October.

First Contribution: On September 11, CPPR gave $7 million to Americas Future Fund (“AFF”). AFF then gave the California Future Fund for Free Markets (“CFF”) just over $4 million. CFF was a registered political committee in California, and disclosed receiving the contribution from AFF. AFF also disclosed making the contribution to CFF. Neither AFF nor CFF disclosed that the money had come from CPPR.

Second Contribution: In mid-October, CPPR gave ARL $18 million. On October 15, ARL gave $11 million to the Small Business Action Committee (“SBAC-PAC”), which is an independent expenditure committee that opposed Proposition 30 and supported Proposition 32 (Prop 30 passed and Prop 32 failed). Both SPAC-PAC and ARL disclosed the contribution, but did not disclose CPPR as the ultimate source of the contributions.

The Key Regulation: The FPPC’s regulations provide that if a 501(c)(4) makes a contribution from its general treasury funds to support or oppose a ballot measure, it must disclose those donors who request or know that their payments will be used to make a contribution to support or oppose a ballot measure. A donor knows its donation will be used to make a contribution if the payment is made in response to a message or solicitation indicating the organization’s intent to make a contribution.

The Violations: The FPPC alleged that under the regulations AFF and ARL should have disclosed CPPR as the source of the funds they used to donate to CFF and SBAC-PAC, respectively. In the settlement, the FPPC makes clear that these were inadvertent or “at worst negligent” and were not knowing and willful violations. The FPPC also determined that neither AFF nor ARL needed to register themselves as political committees.

Not Subject to Disclosure: The FPPC explained in the press release that some of the transactions involved did not have to be disclosed.

First, the FPPC said that AJS (the entity at the top of the chart) raised its money for the purpose of funding issue ads that did not expressly advocate for or against a ballot measure. As such, the sources of the funds it raised were not disclosable.

The FPPC also said that the money AJS gave to CPPR was not earmarked for specific ballot measure, so it too was not disclosable.

Indeed, the FPPC made the remarkable statement that, “ARL’s disclosure of AJS as the source of the contribution prior to the election [as the result of the FPPC’s lawsuit] was erroneous.” In other words, during litigation brought by the FPPC on the eve of the election to determine the source of ARL’s funds, neither ARL nor CPPR was required to disclose AJS as the source of their funds!

Takeaways: This case demonstrates that the FPPC is going to be tenacious with respect to contributions that pass through nonprofits. It seems to be willing to engage in extensive litigation in order to force disclosure even when disclosure is not ultimately required. Moreover, it is willing to disparage defendants in its press releases even when the settlement documents make clear that the reporting violations were at worst negligent. Bottom lines:

If you donate to entities that may contribute to California campaigns, be aware that your contribution may be disclosed.

If you are an entity giving to a California campaign, be prepared for litigation with the FPPC.

If giving to a California campaign, if possible, set up procedures and keep records to demonstrate that sources of funds do not have to be disclosed so that you can response to the FPPC.

Consider whether over-disclosure at one level might make litigation less likely and result in less disclosure from initial sources.